[House Report 115-652]
[From the U.S. Government Publishing Office]


115th Congress    }                                    {        Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                    {       115-652

======================================================================



 
      MONETARY POLICY TRANSPARENCY AND ACCOUNTABILITY ACT OF 2017

                                _______
                                

 April 25, 2018.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 4270]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4270) to amend the Federal Reserve Act to ensure 
transparency in the conduct of monetary policy, and for other 
purposes, having considered the same, report favorably thereon 
without amendment and recommend that the bill do pass.

                          PURPOSE AND SUMMARY

    On November 7, 2017, Representative Barr introduced H.R. 
4270, the ``Monetary Policy Transparency and Accountability Act 
of 2017'', which requires the Federal Open Market Committee's 
(FOMC's) annual adoption of a monetary policy strategy and 
reference policy rules of its own choosing to facilitate a more 
accessible communication of how incoming data and economic 
forecasts inform the conduct of monetary policy.

                  BACKGROUND AND NEED FOR LEGISLATION

    The goal of H.R. 4270 is to increase monetary policy 
transparency and accountability. According to the Board of 
Governors of the Federal Reserve, the FOMC consists of twelve 
members--the seven members of the Board of Governors of the 
Federal Reserve System; the president of the Federal Reserve 
Bank of New York; and four of the remaining eleven Reserve Bank 
presidents, who serve one-year terms on a rotating basis. The 
rotating seats are filled from the following four groups of 
Banks, one Bank president from each group: Boston, 
Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. 
Louis, and Dallas; and Minneapolis, Kansas City, and San 
Francisco. Nonvoting Reserve Bank presidents attend the 
meetings of the Committee, participate in the discussions, and 
contribute to the Committee's assessment of the economy and 
policy options.
    The FOMC holds eight regularly scheduled meetings per year. 
At these meetings, the Committee reviews economic and financial 
conditions, determines the appropriate stance of monetary 
policy, and assesses the risks to its long-run goals of price 
stability and sustainable economic growth. FOMC decisions about 
the direction and pace of monetary policy depend on ever 
changing data and forecasts. By providing for the regular 
communication of what data FOMC members expect to consider, and 
how those data tend to translate into monetary policy, a non-
binding and plain English publication of a policy strategy and 
a non-technical discussion of how actual policy decisions 
compare to well-known benchmarks can provide households and 
businesses the information they need to make more productive 
economic decisions.
    The FOMC regularly characterizes its conduct of monetary 
policy as ``data dependent.'' In doing so, however, it can 
leave households and businesses uncertain about what data 
matter and how they matter.
    The annual adoption of a monetary policy strategy of its 
own choosing, as well as a small set of reference policy 
models, reduces policy uncertainty and provides stronger 
support for growing economic opportunities.
    During the Committee's July 2017 hearing about Monetary 
Policy and the State of the Economy, also known as the 
``Humphrey-Hawkins hearing'',\1\ Federal Reserve Board Chair 
Janet Yellen expressed interest to work with the Committee on 
Financial Services to codify a simple and effective framework 
for a more transparent and accountable monetary policy. By 
synthesizing thoughtful proposals from both sides of the aisle, 
this framework can considerably strengthen America's economic 
foundation. For example, Democrat witness Dr. Joseph E. Gagnon 
shared the following testimony before the Monetary Policy and 
Trade Subcommittee:\2\

    \1\Full-Committee hearing entitled ``Monetary Policy and the State 
of the Economy,'' July 12, 2017. Archived webcast available at https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID=402098.
    \2\Monetary Policy and Trade Subcommittee hearing entitled ``The 
Fed Turns 100: Lessons Learned Over a Century of Central Banking,'' 
September 11, 2013. Quoted from page 11 of the printed hearing, 
available at https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=347585.

        The best strategy is for the Fed to use various rules 
        in assessing the stance of policy. Whenever it deviates 
        noticeably from popular rules, the Fed should explain 
---------------------------------------------------------------------------
        clearly why it is doing so.

    Other prominent Democratic economists have also advocated 
this approach to monetary policy transparency and 
accountability. For example, former Vice-Chair of the Federal 
Reserve Board, Dr. Donald Kohn, offered the following advice in 
a Brookings Institution report:\3\
---------------------------------------------------------------------------
    \3\Donald Kohn, ``How should central bankers talk about future 
monetary policy? Lessons from the crisis and beyond,'' November 21, 
2016. Accessed October 3, 2017 at https://www.brookings.edu/research/
central-bank-talk-about-future-monetary-policy-lessons-from-the-crisis-
and-beyond/.

        The Federal Reserve should use the semi-annual monetary 
        policy report to better explain and focus on its broad 
        strategy. For some time, as an input to its policy 
        process, the Committee has been shown the results of a 
        number of policy rules based on both incoming data and 
        economic forecasts. And this material has been 
        accompanied by explanations of why the current and 
        expected settings of monetary policy might deviate from 
---------------------------------------------------------------------------
        the rules.

    The ``Monetary Policy Transparency and Accountability Act 
of 2017'' provides for exactly the type of framework that Chair 
Yellen, Dr. Gagnon, and former Vice-Chair Kohn have favorably 
described, and does so by requiring the FOMC to annually:
           Agree upon a ``monetary policy strategy'' of 
        its own choosing--that is, a plain English description 
        of how the Committee's monetary policy instruments 
        (e.g., short-term interest rates) tend to react to 
        relevant data;
           Adopt at least one but not more than three 
        reference policy rules of its own choosing; and
           Review how actual monetary policies may have 
        differed from the reference rules.
    Much more than an academic exercise, this framework can 
fundamentally strengthen our economy by reducing uncertainty 
about where monetary policy might go tomorrow, and thus helping 
households and businesses make better decisions today.\4\ Dr. 
Stephen Cecchetti, who appeared as a Democratic witness before 
the Subcommittees on Financial Institutions and Consumer Credit 
and Monetary Policy and Trade,\5\ emphasized these benefits in 
an article for the St. Louis Federal Reserve bank:
---------------------------------------------------------------------------
    \4\A recent study by Federal Reserve Board economists finds that 
``uncertainty about monetary policy robustly raise credit spreads and 
reduce output.'' Source: Lucas Husted, John Rogers, and Bo Sun (2017). 
``Monetary Policy Uncertainty,'' International Finance Discussion 
Papers 1215. Available at https://doi.org/10.17016/IFDP.2017.1215.
    \5\See the MPT-FI Joint hearing entitled ``Examining the 
Relationship Between Prudential Regulation and Monetary Policy at the 
Federal Reserve,'' September 12, 2017. Archived webcast available at 
https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=402279.

        When people are better informed, they make better 
        decisions, enhancing the efficiency of the economy in 
        allocating resources and improving overall welfare. It 
        would be difficult to find an area of economic life 
        where this line of argument has carried more weight 
        than it has in central banking . . . The essence of 
        good, transparent policy is that the economy and the 
        markets respond to the data, not to the 
        policymakers.\6\
---------------------------------------------------------------------------
    \6\Stephen G. Cecchetti and Stefan Krause, ``Central bank 
structure, policy efficiency, and macroeconomic performance: Exploring 
empirical relationships, Review, Federal Reserve Bank of St. Louis, 
July/August 2002, p. 47. Accessed at https://files.stlouisfed.org/
files/htdocs/publications/review/02/07/47-60Cecchetti.pdf.

    Dr. Donald Kohn, a Brookings Institution Fellow and former 
Vice Chair of the Federal Reserve Board of Governors, offered a 
similar observation while testifying before the Monetary Policy 
and Trade Subcommittee on July 22, 2015:\7\
---------------------------------------------------------------------------
    \7\Monetary Policy and Trade Subcommittee hearing entitled 
``Examining Federal Reserve reform proposals,'' July 22, 2015. Quoted 
from page 8 of the printed hearing, available at https://
financialservices.house.gov/uploadedfiles/114-43.pdf.

        Being as systemic, predictable, and transparent as 
        possible about what the Federal Reserve is doing in 
        monetary policy increases the effectiveness of policy 
        because it helps private market participants accurately 
        anticipate Federal Reserve actions. It enhances your 
---------------------------------------------------------------------------
        ability to assess the policy's strategies of the FOMC.

    And before the full Committee on July 17, 2017, Federal 
Reserve Board Chair Yellen testified that:\8\
---------------------------------------------------------------------------
    \8\Full-Committee hearing entitled ``Monetary Policy and the State 
of the Economy,'' July 12, 2017. Archived webcast available at https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID=402098.

        In evaluating the stance of monetary policy, The FOMC 
        routinely consults monetary policy rules that connect 
        prescriptions for the policy rate with variables 
---------------------------------------------------------------------------
        associated with our mandated objectives.

    By requiring the Fed's Monetary Policy Report to not only 
illustrate how actual monetary policy may have varied from 
different policy rules but also provide transparency to why 
policy may have varied, households and businesses would (as Dr. 
Cecchetti's article emphasizes) ``make better decisions, 
enhancing the efficiency of the economy in allocating resources 
and improving overall welfare.'' Viewed through the lens of 
this and other research and testimony from Committee witnesses, 
the Monetary Policy Transparency and Accountability Act offers 
a fundamentally sound and bi-partisan approach to giving our 
economy a strong hand up.

                                HEARINGS

    The Subcommittee on Monetary Policy and Trade held a 
hearing titled ``Examining Federal Reserve Reform Proposals'' 
to examine matters relating to H.R. 4270 on November 7, 2017.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
November 14 and 15, 2017, and ordered H.R. 4270 to be reported 
favorably to the House without amendment by a recorded vote of 
33 yeas to 26 nays (Record vote no. FC-98), a quorum being 
present.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 33 yeas to 26 nays 
(Record vote no. FC-98), a quorum being present.


                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 4270 
will make Federal Reserve monetary policy decisions easier to 
anticipate and understand so that households and businesses can 
make better choices about how to spend and invest their 
earnings by institutionalizing a policy-communications 
framework that reduces uncertainty about economic 
opportunities.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, January 22, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4270, the Monetary 
Policy Transparency and Accountability Act of 2017. This cost 
estimate supersedes the previous cost estimate for H.R. 4270, 
which CBO transmitted on December 5, 2017. This version 
corrects an error in the description of the bill's 
requirements.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Nathaniel 
Frentz.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 4270--Monetary Policy Transparency and Accountability Act of 2017

    Current law gives the Federal Reserve's Board of Governors 
and its Federal Open Market Committee (FOMC) broad authority to 
establish and conduct monetary policy. Twice each year, the 
Chair of the Federal Reserve is required to present 
Congressional testimony and to report to the Congress 
concerning the efforts, activities, objectives, and plans 
related to monetary policy.
    H.R. 4270 would require the FOMC to establish and describe 
an annual strategy for monetary policy that would include a 
description of the way that the committee would adjust the 
instruments of monetary policy, including an identified primary 
instrument, in response to changes in economic indicators. The 
bill also would require the Federal Reserve's testimony and 
reports to describe at least one reference rule, or 
mathematical equation, that would be used as a benchmark for 
the conduct of monetary policy, and identify whether and how 
actual monetary policy has deviated from that rule.
    The bill would directly affect revenues through the 
operations of the Federal Reserve System, which remits its net 
earnings to the Treasury; those remittances are classified as 
revenues in the federal budget. CBO estimates that enacting 
H.R. 4270 would increase costs of the Federal Reserve starting 
in 2019 and thus decrease federal revenues by $8 million over 
the 2018-2027 period. Those higher costs reflect, in 
particular, CBO's anticipation that the Federal Reserve would 
implement the bill by hiring a small number of additional staff 
to modestly expand its current work on monetary policy rules 
and to coordinate across the offices of the members of the 
FOMC, including the associated regional Federal Reserve Bank 
presidents.
    The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement requirements for legislation 
affecting direct spending or revenues. The net changes in 
revenues that are subject to those procedures are shown in the 
table below. CBO estimates that enacting H.R. 4270 would not 
affect direct spending.

      CBO'S ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4270, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON NOVEMBER 14, 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       By fiscal year, in millions of dollars--
                                                             -------------------------------------------------------------------------------------------
                                                               2018   2019   2020   2021   2022   2023   2024   2025   2026   2027  2018-2022  2018-2027
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       NET INCREASE OR DECREASE (-) IN THE DEFICIT
 
Statutory Pay-As-You-Go Impact..............................      0      1      1      1      1      1      1      1      1      1         3          8
--------------------------------------------------------------------------------------------------------------------------------------------------------

    CBO estimates that enacting H.R. 4270 would not affect net 
direct spending or increase on-budget deficits by more than $5 
billion in any of the four consecutive 10-year periods 
beginning in 2028.
    H.R. 4270 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would impose no costs on state, local, or tribal governments.
    This cost estimate supersedes the previous cost estimate 
for H.R. 4270, which CBO transmitted on December 5, 2017. The 
prior estimate erroneously indicated that the bill would 
require that the FOMC establish a mathematical description of 
the way that the committee would adjust the instruments of 
monetary policy. This revised cost estimate corrects the 
description of H.R. 4270 but does not change the estimated cost 
of the bill.
    The CBO staff contact for this estimate is Nathaniel 
Frentz. The estimate was approved by John McClelland, Assistant 
Director for Tax Analysis.

                       FEDERAL MANDATES STATEMENT

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995. The Committee has 
determined that the bill does not contain Federal mandates on 
the private sector. The Committee has determined that the bill 
does not impose a Federal intergovernmental mandate on State, 
local, or tribal governments.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    DUPLICATION OF FEDERAL PROGRAMS

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This Section cites H.R. 4270 as the Monetary Policy 
Transparency and Accountability Act of 2017.

Section 2. Monetary policy transparency and accountability

    This section provides for the publication of a plain 
English, non-technical, description of how the FOMC expects 
monetary policy to change with incoming data and forecasts, and 
testify on how the actual conduct of monetary policy compares 
to a small set of reference rules of the FOMC's own choosing.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 4270 does not repeal or amend any section of a 
statute. Therefore, the Office of Legislative Counsel did not 
prepare the report contemplated by clause 3(e)(1)(B) of rule 
XIII of the Rules of the House of Representatives.

                             MINORITY VIEWS

    H.R. 4270 requires the Federal Reserve to adopt ``exactly 
one'' monetary policy strategy and between one and three policy 
rules on an annual basis that must be compared against the 
actual conduct of monetary policy.
    The language calling for ``exactly one'' strategy is 
perhaps one of the most troubling aspects of the bill, which 
has the potential to undermine or curtail the Federal Reserve's 
dual mandate, particularly the full employment aspect, which is 
not mentioned at any point in the bill. Read literally, the 
language appears to require the Federal Reserve to choose 
between full employment and price stability. Given the litany 
of Republican members that have called for the Federal Reserve 
to drop its focus on full employment in other contexts, the 
``exactly one'' language raises significant concerns that 
warrant a cautious approach to meddling with the Federal 
Reserve's monetary policy objectives. A single strategy could 
also be interpreted to prevent the Federal Reserve from 
targeting specific, impaired, sectors of the economy, as the 
Federal Reserve did effectively as part of its most recent 
stimulus program.
    Codifying an obligation for the Federal Reserve to 
reference one to three simplistic policy rules could also have 
unintended and unfortunate consequences.
    First, doing so could result in an overreliance on simple 
rules, which by their nature fail to account for the complexity 
within the U.S. economy that policy makers currently take into 
account in setting monetary policy. As former Vice Chairman of 
the Federal Reserve, Donald Kohn, has previously cautioned, 
``no rule can embody the complexities of the real world in a 
few variables--and efforts to do so will only hamstring the Fed 
from reacting to developments, especially when the real world 
takes unexpected turns outside of historical experience.''
    Second, putting reference policy rule requirements into law 
could easily serve to discourage Federal Reserve policymakers 
from deviating from the simplistic rules-based policy 
prescriptions, even when a failure to do so could have 
significant adverse consequences on the wealth and well-being 
of hard-working American families. For example, in the 
aftermath of the 2008 financial crisis, the Federal Reserve has 
consistently targeted a level for short-term rates that is well 
below the level called for by many reference rules. Had the 
Federal Reserve followed the simplistic prescriptions of a 
number of the most frequently referenced policy rules and 
prematurely raised rates, it could have slowed the recovery, 
reduced employment opportunities, and otherwise inflicted 
economic pain on American households and businesses.
    Despite taking swift, bold, and unprecedented steps which 
were key to our economy's recovery, Republicans have frequently 
attacked the Federal Reserve's conduct of monetary policy, 
making monetary policy the scapegoat for their own failed 
fiscal policies which slowed the economy's progress and 
undercut the Federal Reserve's efforts. Creating a legal 
requirement that discourages such bold action should be 
rejected.
    While Republicans argue that the legislation is needed to 
increase accountability and transparency, both of which are 
noble objectives, Federal Reserve officials already conduct the 
type of open and transparent communication that this bill calls 
for.
    For each of these reasons, we oppose H.R. 4270.

                                   Maxine Waters.
                                   Daniel T. Kildee.
                                   Michael E. Capuano.
                                   Stephen F. Lynch.
                                   Nydia M. Velazquez.
                                   Keith Ellison.
                                   Joyce Beatty.
                                   Al Green.
                                   Wm. Lacy Clay.
                                   Carolyn B. Maloney.
                                   Ruben J. Kihuen.

                                  [all]